SME innovations: Market novelties have been declining for years

• After dropping significantly in the economic and financial crisis, innovation activity has recovered slightly but is still far below pre-crisis levels
• Development of market novelties declining structurally since 2000
• Share of companies conducting regular R&D declining since 2000, limiting the future innovative capacity of small and medium-sized enterprises

Over the past years, Germany's small and medium-sized enterprises have cut back their innovative efforts. Although the number of enterprises that innovate is increasing moderately now that the economic and financial crisis has been overcome, the companies are producing ever fewer genuine market novelties and many industries are steadily reducing R&D activities of their own. This is the result of the current survey conducted by KfW Bankengruppe on the basis of data from the KfW SME Panel for the years 2000 to 2010.

The data show that the recent financial and economic crisis has had a negative impact on innovation activity. As a consequence, the innovator rate, i.e. the share of companies that introduced innovations in the past three years, fell drastically by one third from its peak of 43% in the period 2004/06 to 29% in 2007/09. As the economy recovered after the end of the financial and economic crisis, this share increased again slightly to 32% but is still a good 10 percentage points below the level of 2004/06.

Particularly worrying is the ongoing decline in the development of market novelties and the strong concentration of research and development activities on the R&D intensive manufacturing industry, such as mechanical engineering, chemicals/pharmaceuticals, measuring and controlling technology and the automotive industry.

The share of "true innovators", i.e. those enterprises that bring products onto the market that no other competitor has yet offered, has dropped by one half from 8% to 4% over the last decade. This trend appears to be continuing at the current margin.

The downward trend in original product innovators is observable across all company sizes. Where market novelties continue to be developed it is primarily by enterprises of the R&D intensive manufacturing industry. While the share of enterprises with market novelties in these industries increased from 12% in the period of 2006/08 to 18% in 2008/10, original product innovators have become increasingly rare in the service sector as well as in the non-R&D intensive branches of the manufacturing industry such as the food industry, wood or metal processing.

Dr Norbert Irsch, Chief Economist of KfW Bankengruppe: "The decline in the share of SMEs that introduce original product innovations to the market should be viewed with concern because it is developing as a structural trend that is independent from the economic cycle. This trend and the withdrawal of increasingly more enterprises outside the R&D intensive manufacturing industry from research and development activities of their own put them at risk of losing know-how that is important to secure the technological edge and threaten to weaken the future innovative capacity of small and medium-sized enterprises. As a result, important stimuli for Germany's economic, ecological and social development will be lost. Even if the Euro crisis is currently dominating the public debate, the structural challenges and regular economic policy tasks must not be neglected."

Note:
The study "Weniger Marktneuheiten im Mittelstand" [Declining market novelties in the Mittelstand"] (in German) can be accessed at www.kfw.de under the category "Research".